What To Do With Your 401(k) During Coronavirus
The start of the year has been a rollercoaster ride for the stock market. By the end of March, the S&P 500 lost about 30% of its value since its peak in mid-February, though it has rebounded quite a bit since then. Very few industries are immune to the economic effects of the coronavirus, and unemployment numbers prove it. The Labor Department reported that the number of Americans applying for state unemployment benefits over the last 6 weeks, since quarantine measures essentially began, has surpassed 25 million. That number exceeds the roughly 22 million jobs added to payrolls since November 2009, the start of the financial crisis recovery.
High unemployment, combined with stock market uncertainty, has left many Americans uncertain about the fate of their retirement savings, specifically in qualified retirement plans including 401(k)s, 403(b)s, profit-sharing plans, etc. It’s important to try to leave your retirement accounts untouched and align your investments with your long-term goals, but below are additional considerations based on your unique circumstances as we ride out the coronavirus.
If Your Are Employed
If you have a regular paycheck coming in, and you are not panicked about losing your job, consider maintaining your normal savings contributions. Start by ensuring you have an adequate cash reserve for emergencies with at least 3-6 months of your essential monthly expenses saved in a safe, liquid account such as checking/savings.
Next, maintain your 401(k) savings rate and try to, at the very least, take advantage of your employer match. By continuing to save into your retirement plan at work, you will be buying into the market at fixed intervals on a regular basis. This strategy, known as dollar-cost averaging, has been shown to lower your average buy-in price and maximize investment return potential. Furthermore, because of the drastic market downturn, you will be buying in at a relative low point in the market, which will serve you well if you have a longer time horizon.
When it comes to investment changes during bouts of volatility, sometimes no action is the best action. Make sure your investment portfolio is aligned with your long-term goals, time horizon, and risk tolerance, and stay the course.
If You Fear You May be Furloughed or Laid Off
Cash is king if you are uncertain about your current employment situation. If you think you may be furloughed, laid off, or experience a drastic cut in pay, consider making your cash reserve a top priority. You will want to target a minimum of 6 months of your essential monthly expenses in a cash reserve. If you are already at that level or close to it, consider continuing to take advantage of your 401(k) employer match if your company offers one.
Having a cash reserve will allow you to avoid pulling money from investment accounts, or worse, taking on debt, to cover your bills. Not only will your cash reserve allow you to cover your essential expenses each month including housing, utilities, car, groceries, etc., if your are unemployed, it can also fund health insurance premiums and other important benefits that you would otherwise obtain through work.
Though tempting, resist the urge to make drastic changes to your 401(k) investment allocation assuming it is already aligned with your long-term goals. If you make changes that restrict your ability to ride a market recovery, such as moving to cash or bonds, it could have a lasting negative effect on your net worth growth. After all, this will pass! Successful investing is about time in the market, not timing the market.
If You Have Been Furloughed or Laid Off
You are not alone. More than 26 million Americans have filed for unemployment benefits since mid-March, according to the Labor Department. Of course, tightening your belt and cutting unnecessary expenses is a smart first step to ensure you don’t draw from your accounts too aggressively. While your cash reserve is the most logical place to withdraw money from to cover essential expenses, the CARES Act makes it easier for you to tap your 401(k) or other retirement accounts, if necessary.
If you are facing financial hardships due to the coronavirus, you can take a withdrawal of up to $100,000 from your retirement accounts including 401(k)s, 403(b)s, IRAs, etc., without incurring the 10% early withdrawal penalty prior to the age of 59½. Keep in mind, you will still need to pay income taxes on the distribution unless the money comes from a Roth (after-tax) retirement account. The CARES Act also allows you to borrow from your retirement accounts and delay repayment for up to one year. The typical plan requires repayments within 5 years of the initial loan.
An early withdrawal or loan from your retirement account should really be a last-resort effort to cover expenses. You would be solidifying your investment losses if you choose to take a withdrawal or loan during this market downturn, and if you are a young investor with a longer time horizon, you’d be missing out on the potential for considerable compounding when the market recovers.
Check out additional Financial Planning Actions Amidst Coronavirus Uncertainty to put yourself in a strong financial position as we ride out the pandemic and market volatility.
Do you want to talk about other ways you can take positive action amidst coronavirus uncertainty? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.